Real Estate Investor Magazine South Africa Real Estate Investor Magazine - October 2017 | Page 33

INSIGHTS
JOHN LOOS
Household and Property Sector
Strategist at FNB
P
erhaps surprisingly, both of the
key quarterly FNB Housing Af-
fordability Ratios pointed to a
slight residential affordability deterio-
ration in the first two quarters of 2017,
despite relatively slow average house
price growth.
For both credit-dependent, as well as
cash home buyers, home affordability
has deteriorated very slightly in the first
two quarters of 2017.
Deteriorations across the
board
The first affordability measure, namely
the “Average House Price/Per Capita
Disposable Income Ratio Index”, rose
(deteriorated) by a slight +0.6% in the
second quarter of 2017, following on a
+0.3% revised increase in the first quar-
ter, the second consecutive quarter of
increase.
The second measure, namely the “In-
stallment Value on a new 100% Bond
on the Average Priced House/Per Cap-
ita Disposable Income Ratio Index”,
also rose (deteriorated) by +0.6% in the
second quarter after a 0.3% rise in the
first, the same magnitudes as the former
index, given that there were no interest
rate changes in the first half of this year
(the first small rate cut only coming in
July).
This slight deterioration in home af-
fordability may appear a little strange,
given that house price growth has re-
cently been very weak, but it reflects
even slower quarter-on-quarter Real Per
Capita Disposable Income growth of
Households. These most recent afford-
ability index readings point to just how
financially challenging the economic
environment of South Africa is becom-
ing, with even very slow, low single-digit
house price growth not leading to no-
ticeable affordability improvement, as
economic growth stagnates and various
household-related taxes and tariffs rise.
A matter of perspective
This begs the question: Do we want
housing affordability improvement? It
sounds good when we use the termi-
nology “affordability improvement”, but
many home owners and property indus-
try players are less enthusiastic about it
when we talk about “real house price de-
cline”, which, in effect, an affordability
improvement often is.
The answer to the question depends
on whether you are a home owner al-
ready, or whether you are an aspirant
home owner looking at the market,
wondering how you are ever going to
afford a home.
My answer is somewhat different
in that I believe that real house prices
should be at a level that reflects the un-
derlying economic fundamentals of the
country, whatever those are at the time.
And unfortunately, at present, I believe
that real price/affordability ratio levels
are still too high to be reflective of what
looks to be a period of long term eco-
nomic weakness setting in. The Average
House Price/Per Capita Disposable
Income Ratio Index remains relatively
high, 24.1% higher than its beginning
of 2001 level (just before last decade’s
price-boom kicked in).
Examining over 50 years worth of
house price historic data (courtesy of
Absa), I believe that real house prices
and affordability ratios are relatively
high by historic standards. They shot up
to extreme levels in the pre-2008 boom,
and have arguably not fully correct-
ed, still in part reflecting a brief period
where economic growth reached beyond
5%, and not the current period where we
battle to stay above zero.
But while a real price correction (af-
fordability improvement) is probably
due, given the weak economic funda-
mentals, it is also important to me that
such corrections happen in an “orderly”
way. By this I mean that it is preferable
to have low but positive nominal house
price growth over a number of years,
price growth which is below income
growth or consumer inflation growth,
translating into a slow “real correction”
where as few people as possible face a
“negative equity” situation.
Can such a slow real price correction
happen? We think that this probability
is greatly enhanced compared to what it
was in decades prior to the 2000’s, be-
cause the SARB is far more slow-mov-
ing today. Its gradual approach to in-
terest rates can be hugely beneficial in
smoothing out economic and housing
market cycles. This is a very different,
and I believe more beneficial, approach
compared to more “rapid fire” interest
rate hiking and cutting in those earlier
times.
Let’s hope so.
SA Real Estate Investor Magazine OCTOBER 2017
31